‘How to safeguard Nigerian businesses from impact of soaring energy price’

The current surge in global energy prices, driven by escalating geopolitical tensions in the Middle East, has intensified cost pressures for businesses across many economies. Yesterday, Brent crude sold at $103.1 per barrel while West Texas Intermediate was $98.71 per barrel.

The effect has triggered the pump prices of premium motor spirit (PMS) or petrol and the Automotive Gas Oil (AGO) otherwise known as diesel. As at yesterday, petrol prices ranged from N1, 235 and N1, 500 per litre; while diesel sold for between N1, 529 and N1, 800 per litre in the country.

A more reliable electricity supply would significantly reduce the heavy dependence of businesses on diesel and petrol generators, which currently constitute a major component of operating costs. Improving power sector performance would therefore lower production costs across the economy, enhance business competitiveness, and provide much-needed relief for small and medium enterprises.

The impact of the escalating fuel price has become especially severe because on business in the country who are heavily reliant on the commodity for their businesses. The pressure on businesses has been further intense amid persistent electricity supply challenges, while also facing rising transport and distribution costs due to higher energy prices.

The combined effect of these has led to a significant escalation in operating expenses, mounting pressure on profit margins and heightened risks to business sustainability, particularly for small and medium enterprises.
Still, the woes of enterprises are being further complicated as they continue to contend with multiple macroeconomic pressures including high inflation, elevated interest rates and weak consumer purchasing power.

The latest escalation in energy costs, experts said, compounds an already challenging operating environment. They warned that without deliberate adjustments by businesses and supportive policy interventions from government, rising energy costs could significantly erode profit margins, weaken business sustainability and dampen economic growth.

Policy analysts and economists at the weekend warned that the resilience of Nigerian businesses at this period will depend on improving energy efficiency, diversifying energy sources, strengthening financial management and improving logistics efficiency. For government, they further clarified, the oil spike arising from the Middle-East crises, underscores the urgency of accelerating reforms in electricity supply, renewable energy adoption and domestic refining capacity.

They are convinced that with the right combination of proactive business adaptation and supportive public policy, Nigeria can significantly mitigate the impact of the current energy price shock and strengthen the resilience and competitiveness of its business environment.

But central to achieving this, is the need to strengthen domestic refining capacity. According to the Chief Executive Officer, Center for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, domestic refining is a critical pillar of Nigeria’s energy security and an important buffer against volatility in the global energy market.

Therefore, expanding local refining capacity and ensuring a stable and predictable supply of crude oil to domestic refineries, he said, are essential for strengthening the resilience of the country’s petroleum products market. He further contended that beyond supply security, domestic refining also has significant macroeconomic benefits.

“By reducing the country’s dependence on imported petroleum products, local refining lowers the demand for foreign exchange used for fuel imports, thereby easing pressure on the exchange rate and improving Nigeria’s balance of trade. Over time, a strong domestic refining base can also support export opportunities for refined products within the African region, further strengthening external reserves and Nigeria’s position in regional energy markets. A well-functioning domestic refining ecosystem can help moderate the transmission of global supply disruptions into the domestic economy,” Yusuf said.

Yet, the CPPE boss maintained that the most sustainable solution to Nigeria’s high energy cost environment lies in improving the reliability and availability of grid electricity. Government, he said, therefore needs to intensify efforts to expand electricity generation capacity, strengthen transmission infrastructure and enhance the efficiency and financial viability of electricity distribution networks across the country.

Yusuf argued that improving energy efficiency remains the quickest and most cost-effective strategy for businesses to manage rising energy costs. Firms, he said, should undertake a comprehensive review of their energy consumption patterns with the objective of minimising waste and maximising productivity per unit of energy used.

Besides, he advised that businesses should intensify efforts to improve energy efficiency within their operations as a key strategy for managing rising fuel costs. This includes optimising generator operating hours, deploying energy-efficient machinery and equipment, strengthening internal energy management practices and promoting energy conservation among staff.

According to him, the current crisis on the Middle East highlights the strategic importance of energy diversification. Nigerian businesses, he lamented, remain excessively dependent on diesel and petrol generators for electricity generation. This exposes firms to significant fuel price volatility.

“Businesses should therefore gradually explore alternative energy solutions such as solar power systems, hybrid energy systems combining solar with generators, and gas-powered generators in locations where gas infrastructure is available. While the upfront investment cost may appear significant, the long-term savings from renewable and hybrid energy solutions are becoming increasingly compelling in the face of persistently high fuel prices,” he admonished.

The CPPE, a think-tank economic and policy group, said energy price shocks often transmit strongly through logistics and transportation costs. It therefore advised businesses to review their logistics operations with a view to improving efficiency and reducing fuel consumption. In this case, strategies such as consolidating deliveries, optimising transport routes, improving fleet management systems and leveraging shared logistics platforms, it noted, can significantly reduce transportation costs. It offered that increased adoption of digital platforms and remote transactions can also reduce the need for physical movement, thereby lowering energy expenditure within supply chains.

“Businesses may need to review their pricing structures to reflect rising operating costs. However, price adjustments must be carefully calibrated in order to avoid losing customers in an already fragile consumer market.
“Gradual price adjustments, improved product value propositions and innovative packaging strategies—such as smaller product sizes or product redesign—can help firms remain competitive while managing cost pressures,” the Group said.

Yusuf, an economist, warned that periods of energy price volatility often create liquidity pressures for businesses, especially SMEs with limited financial buffers. Firms, he advised, should therefore strengthen financial management practices by minimising non-essential expenditures, improving inventory management and renegotiating supplier payment terms where feasible.

“Maintaining adequate liquidity buffers will help businesses withstand temporary cost shocks and maintain operational stability. Also, businesses operating within industrial clusters can significantly reduce operating costs through shared infrastructure arrangements. Shared power generation systems, shared logistics services and shared warehousing facilities can create economies of scale that reduce both energy and logistics costs.

“Collaborative arrangements among SMEs can therefore play an important role in improving operational efficiency and resilience during periods of cost shocks,” he submitted.

On policy priorities for government, the CPPE boss advised government to expand fiscal and regulatory incentives that encourage businesses to adopt renewable energy solutions. This option he noted may include tax incentives for solar installations, import duty waivers for renewable energy equipment and fiscal support for investments in energy-efficient technologies.

“Such measures would help reduce the structural energy cost burden faced by Nigerian businesses. Inclusively, access to affordable financing remains one of the major barriers preventing SMEs from investing in alternative energy systems. Government, development finance institutions and commercial banks should therefore create dedicated financing windows to support investments in renewable energy solutions and energy-efficient equipment. Reducing the cost of financing will accelerate the transition to cleaner and more affordable energy systems for businesses,” Dr. Yusuf said.